Credit cards are like sharp knives. They’re wonderful tools, but they can damage you badly if you use them incorrectly.
Whenever I hear from someone who is having trouble paying their credit card bills and is struggling to keep their head above water, I encourage them to lock down their credit cards. Cut them up. Freeze them in a block of ice.
But what about people who don’t have any credit card debt and want to use one to maintain a good credit history so that they can get good insurance rates and a good rate on an eventual mortgage?
For those people, a credit card can be a great option as long as they follow what I consider to be the golden rule of healthy credit card usage: pay off the whole balance each month.
Credit cards can be incredibly useful tools for convenience when doing many routine tasks, like buying gas or visiting a checkout. While most of these tasks also accept debit cards, I prefer using a credit card because if there’s an identity theft, the money is not drained from my checking account until I discover the issue.
As I’ve mentioned several times recently, the trick with credit cards is to not allow them to trick you into a false sense of financial confidence. When you buy something with a credit card, it is not immediately reflected in the balance of your checking account, and that fact can often lull people into a false sense of financial security, which can lead to overspending.
The trick is to understand what you’re spending and stick to a budget, whether it’s formal or not.
If you’ve decided to allow yourself $200 in discretionary spending a month in your budget, stick to that amount whether you’re using a credit card or you’re using cash. However you pay for it, stick with a total of $200 per month.
If you’ve budgeted $500 a month for your family’s food, stick to that amount regardless of how you pay for it. Just because you have a large credit limit on your card doesn’t mean it’s a good decision to go over your budgeted amount.
If you stick steadfastly to your budget, you will be spending less than you earn and you’ll always have enough to pay your credit card bill in full at the end of the month.
This affords you the convenience and consumer protection of a credit card and the natural bolstering of your credit report and credit scores that come with it, and you’ll achieve that without any danger of falling into debt.
This post is part of a yearlong series called “365 Ways to Live Cheap (Revisited),” in which I’m revisiting the entries from my book “365 Ways to Live Cheap,” which is available at Amazon and at bookstores everywhere. Images courtesy of Brittany Lynne Photography, the proprietor of which is my “photography intern” for this project.